ENERGY BLOG

Month: July 2018

We woke up to be surprised to find oil markets (still at 6:40am EDT) are looking thru any concerns that Saudi Arabia halted tanker shipments thru the Bab el Mandeb (southern Red Sea) in response to a successful Houthi attack on a Very Large Crude Carriers (VLCCs) that has a capacity of 2 million barrels of oil. Saudi Arabia said the VLCC had “minimal damage” but it was a success as the tanker was forced to return to port and it forced Saudi Arabia to halt tanker traffic thru the Bab el Mandeb. There was another VLCC attacked but no reported damages. Rather oil markets are pricing in only a marginal supply cost for some tankers to avoid the Red Sea and possibly also a marginal reduction in oil demand. We had expected a bigger price reaction and last night (10:30pm EDT) posted our blog “Major Global Oil Supply Chain Hit, Saudi Arabia Stops Oil Shipments Thru Red Sea Following Houthi Attack On A SuperTanker”. We expect this will be a hit to the supply chain by risk and insurance forcing tankers to avoid the Bab el Mandeb, but we expected a bigger price reaction and a widening of the Brent WTI diff ie. some geopolitical risk premium and not just added tanker time. Brent WTI diffs have widened, but the Brent price move and Brent WTI diff this morning look to only be pricing in some marginal tanker costs to avoid the Red Sea and possibly some marginal oil demand reduction at Saudi Arabia’s 1.035 mmb/d oil refineries at Yanbu on the Red Sea. Its seems to only be a marginal tanker transportation cost response to oil without any geopolitical risk element, and the markets don’t seem to see any increased opportunity for US oil exports to Europe as Europe also imported 1.599 mmb/d of oil in 2017 from Iran, Iraq and Kuwait.

There is big news in oil markets tonight with Saudi Arabia announcing at 5:20pm EDT that it was temporarily halting all oil tanker shipments thru the Red Sea. This was in response to the Houthis attack on two Very Large Crude Carriers (VLCCs) that each has capacity of 2 million barrels of oil. Saudi Arabia said one of the ships sustained “minimal damage”, but did not disclose the nature of the attack ie. mine, boat, missile, rocket or drone. This is going to make all insurers and other shippers pay attention and we have to believe other shippers/insurers will follow suit. There is no indication of how long the stoppage will last, but we have to believe the Saudis will want to see a substantial reduction in the risk, which means they will inevitably accelerate attacks/bombing to force the Houthis out of the port of Hodeidah. And we expect that for those that can’t self insure, the insurers will likely need even more comfort ie. take longer. This is a significant hit to the global oil supply chain. The EIA estimated that there was 4.8 mmb/d of oil and petroleum products thru the Red Sea/Bab el Mandeb from the combined northerly and southerly tanker volumes. Its not just the Saudis that ship oil and petroleum products south from their Yanbu export terminal thru the Bab el Mandeb. We are surprised that oil has only increased slightly since the new broke four hours ago and, in particular, we would have expected a much wider Brent WTI spread than has shown up until 9:20pm EDT. We look for Brent to go much higher tomorrow and the Brent WTI spread to widen.

Its tough for anyone to make a natural gas supply/demand forecast without know how cold it will be this winter. Henry Hub (HH) gas prices have fallen back to ~$2.80 in July despite gas storage being 725 bcf lower YoY and the summer gas storage injection season being almost 50% finished. HH prices and natural gas tone are being held back by US gas supply being up ~8 bcf/d YoY in 2018. We are now seeing increasing expectations for an El Nino winter, which typically means a warmer winter. This means markets are going to focus soon on winter weather and will worry that the combination of a warm winter and continued high US gas supply will lead to very low gas storage withdraws this winter. There can be a huge swing in winter residential and commercial natural gas demand between a very warm winter and a cold winter or even a normal winter. But we just came through a very warm winter and not a normal or cold winter. If the EIA’s call is right on US gas exports, industrial demand and electric power demand (ie. before considering changes in residential and commercial demand), storage at Apr 1/19 should only be ~270 bcf higher YoY even if its as warm as just finished very warm winter. Residential and commercial demand forecasts will be wrong depending on the weather and will be changed depending on how El Nino develops. The purpose of this blog is to illustrate the math on where storage should be on Apr 1/19 if its as warm as the just finished very warm winter. Its been a great Q2/18 for storage despite the record US gas supply. Weather and storage have surprised to positive with a very cold April and record/near record May and June. The math is showing that if its another warm winter like last year storage at Apr 1/19 should only be ~270 bcf higher YoY. This will bring a negative to natural gas, but not a big negative and likely a relief that demand is doing a good job of absorbing or mostly absorbing the big increases in US gas supply.

Anyone who heard Canada Natural Resource Minister Carr’s comments to introduce the Generation Energy Council Report “Canada’s Energy Transition: Getting to Our Energy Future, Together” could easily see that this recommended energy vision for Canada’s future has be assuming LNG Canada as the cornerstone of Canada’s LNG future. Canadian Press reported that Carr said “Canada’s long-term goal is to become the world’s cleanest producer of liquefied natural gas, which can then displace dirtier sources of electricity around the world, particularly coal in Asia.” We don’t believe it’s a coincidence, but there is only one other occasion that we can recall any company or any country emphasizing the strength or advantage of LNG using the adjective “cleanest”. It was in Davos in Feb, when the National Post reported “In the early evening, Trudeau met with the head of Royal Dutch Shell, Ben van Beurden, who said in front of reporters his company is looking to invest in a major “green” project in Canada. “We are looking indeed … probably investing in the greenest and cleanest energy project ever built and probably looking at the largest single investment ever made in Canada,” van Beurden said without elaborating. To which Trudeau replied, “Very exciting.” Readers of our research know we have been very bullish on LNG Canada going FID in 2018 and earlier than expected so this effective implied inclusion in the Liberals energy vision doesn’t change our bullish views. We don’t believe the Carr would have highlighted LNG in this report unless the Liberals were confident LNG Canada was going FID soon, and to have this confidence, we also have to wonder if the Liberals will be providing relief on the major outstanding cost and execution issue for LNG Canada – the 45% anti dumping duties.

Its only been 11 days since the OPEC/non-OPEC June 22/23 deal to increase oil supply by ~1 mmb/d, but there have been multiple oil supply events that have made that deal far out of date. Saudi Arabia and Russia might have had a different strategy at the June 22/23 meetings if they had known there was an immediate oil supply loss coming of ~1.3 mmb/d. But since June 22/23, three events have taken off ~1.3 mmb/d of oil supply – Libya an additional 400,000 b/d to 850,000 b/d with no specific return data, Syncrude ~350,000 b/d but is now not expected back on until early Aug, and US oil production being ~100,000 b/d lower than expected actuals. Prior to the June 22/23 meetings, we didn’t think it mattered how much OPEC/non-OPEC supply increased that weekend, we saw WTI going back above $70 with normal seasonal demand and much higher depending on Venezuela and Iran. We believed normal higher seasonal oil demand can accommodate the return of OPEC/non-OPEC barrels, a reduction in demand from trade wars, and increasing non-OPEC supply. And that this would set the stage for WTI to go back over $70. We identified the wildcards for oil to go even higher were Venezuela and Iran ie. if Venezuela declines like we expect below 1 mmb/d in a matter of months and if the US is firm in trying to get its sanctions on Iran to significantly reduce its oil exports (ie. back to at least pre nuclear deal levels). Syncrude should be coming back on and if US oil supply is only ~100,000 b/d less than expected, these shouldn’t be big pushes to move WTI higher. However, unless Saudi Arabia/Russia step up to fill the additional gap, if Libya’s oil production ends up being 200,000 to 300, 000 b/d for the next month or two and not ~1 mmb/d like it was in April/May, WTI should be moving to $80 or higher.